There appears to be growing conviction that what we've been witnessing the past eight weeks in the stock market is something more than a bear-market rally. Unfortunately, this is not the beginning of a secular bull market. Bear market conditions will likely resume. Buying the S&P 500 at these valuations is very risky given the awful economic fundamentals and considerable work required to repair the damage to the financial and economic system caused by the excesses of the past two decades. The massive monetary and fiscal policy responses to this crisis alone would suggest that this will not be a typical recession and recovery in severity or duration.
Grant's Interest Rate Observer estimates that the government has currently provided combined monetary and fiscal stimulus of approximately 30% of U. S. gross domestic product (GDP) of $14.2 trillion. This level of stimulus is unprecedented. For example, monetary and fiscal stimulus applied in The Great Depression period of August 1929 to March 1933 totalled 8% of GDP. The combined stimulus in the 2001 recession totalled 7% of GDP. The central issue for the U.S. economic system is that we have too much debt - personal, corporate and governmental. Total debt to GDP approximates 360%, up dramatically from 230% in the early 1990s. This debt needs to be paid off through savings, restructured (debt for equity exchanges), destroyed through defaults or otherwise inflated away. This is likely the beginning of a major generational economic adjustment with prudent savings for retirement replacing profligate spending of the massive baby boomer generation. Consumer spending represents approximately 70% of U.S. GDP and will be adjusting downward toward 63% level as the consumer savings rate rises to 5% to 10%.
U.S. economic issues of this size and scope will not be resolved quickly. Ever since Ben Bernanke, chairman of the Federal Reserve Board, told 60 Minutes in mid-March that he detected "green shoots" of economic recovery, the phrase "green shoots" has become an often used propaganda message. Desperate for any sign of hope, the political establishment, Wall Street strategists, and media experts have taken to repeating the phrase "green shoots" as a soothing mantra. The Administration, Congress and the Fed continue to throw manure on these economic "green shoots." Please do not let this beautiful farming imagery mask the truth. In reality, the U.S. economy has only shown signs that it was deteriorating more slowly. This passes for improvement and economic "green shoots." Like life, there are no shortcuts to economic nirvana. There is a lot of hoeing still required to get our economy back on a sustainable growth path. As Dwight Eisenhower once said "Farming looks mighty easy when your plow is a pencil and you're a thousand miles from the corn field." In short, Ben Bernanke is an academic, pencil pushing bureaucrat, not a green thumbed farmer. Some of Ben's monetary actions and related Federal policy responses will undoubtedly fail to produce the intended results and may also have major unintended consequences.
This is reminiscent of the parable of the sower. The parable tells of seeds that were erratically scattered by a sower, some falling on the road and consequently eaten by birds, some falling on rock and consequently unable to take root, and some falling on thorns which choked the seed. According to the parable, it was only the seeds that fell on good soil and were able to germinate, producing a crop thirty, sixty, or even a hundredfold. Like the sower in the parable, the U. S. government has crudely distributed massive amounts of monetary and fiscal stimulus (seeds). Unfortunately, many financial experts believe that only a limited number of these economic seeds have been targeted to the "good soil" of infrastructure projects or other fertile commercial areas that will ultimately enhance the long term productive capacity of our nation. The rest of the seed has fallen on road, rock or near thorns.
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